The following discussion should be read in conjunction with our consolidated
financial statements and accompanying notes included in Item 8 of this Form
10-K. This section of this Form 10-K generally discusses 2022 and 2021 items and
year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and
year-to-year comparisons between 2021 and 2020 are not included in this Form
10-K, and can be found in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Part II, Item 7 of our Annual Report on
Form 10-K for the fiscal year ended
Our fiscal year is the 52- or 53-week period that ends on the Saturday nearest
to
Overview
Economic Conditions, Challenges and Risks
Our performance, financial condition and prospects are affected by a number of factors and are exposed to a number of risks and uncertainties. We operate in a competitive and rapidly evolving industry in which new risks emerge from time to time, and it is not possible for us to predict all of the risks we may face, nor can we assess the impact of all factors on our business or the extent to which any factor or combination of factors could cause actual results to differ from our expectations. See the discussion of certain risks that we face under "Risk Factors" in Item 1A of this report.
Impact of COVID-19 on our Business
The impact of the COVID-19 pandemic will have on our consolidated results of operations is uncertain. Although we initially observed demand increases in our products, we anticipate that the global health crisis caused by COVID-19 may negatively impact business activity across the globe. We will continue to actively monitor the situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, suppliers, and stakeholders, or as required by federal, state, or local authorities. It is not clear what the potential effects of such alterations or modifications may have on our business, consolidated results of operations, financial condition, and liquidity.
Fiscal Year Highlights
Amendment to SVB Credit Agreement
On
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Second 2021 Lincoln Park Purchase Agreement
On
During 2022,
Subsequent to
Ineffective Internal Control over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in
internal control over financial reporting such that there is a reasonable
possibility that a material misstatement of our annual or interim consolidated
financial statements will not be prevented or detected on a timely basis. In
performing their audit of our internal control over financial reporting as
required by Section 404 of SOX, our independent registered public accounting
firm concluded that our internal control over financial reporting was
ineffective as of
While the control weaknesses identified did not result in any identified misstatements, a reasonable possibility exists that a material misstatement to the annual or interim consolidated financial statements and disclosures will not be prevented or detected on a timely basis.
In an effort to address the identified material weakness related to the lack of an independent board and audit committee and to enhance our internal controls, our finance and accounting personnel are continuing to follow all of the same procedures that they undertook in preparation for independent audit committee meetings on a quarterly and annual basis. Our CEO and sole director will oversee these processes and review materials prepared by the finance and accounting staff as well as our independent registered public accounting firm on a quarterly and annual basis. If our measures are insufficient to address the material weakness, or if additional material weaknesses or significant deficiencies in our internal control over financial reporting occur in the future, we may not be able to timely or accurately report our results of operations or maintain effective disclosure controls and procedures. If we are unable to report financial information timely or accurately, or to maintain effective disclosure controls and procedures, we could be required to restate our financial statements and be subject to, among other things, regulatory or enforcement actions, securities litigation, limitations on our ability to access capital markets, debt rating agency downgrades or rating withdrawals, or loss in confidence of our investors, any one of which could adversely affect the valuation of our common stock and our business prospects. We can give no assurance that the measures we have taken and plan to take in the future will remediate the material weakness identified or that any additional material weaknesses will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting.
39 Table of Contents Results of OperationsNet Sales and Gross Margin Net sales and gross margin for 2022 and 2021 were as follows (dollars in thousands): 2022 2021 Change Net product sales$ 161,637 $ 102,355 58% License fee - 40,000 (100%) Net sales$ 161,637 $ 142,355 14% Gross profit - product sales$ 11,892 $ 8,897 34% Gross margin percentage - product sales 7% 9% Gross profit$ 11,892 $ 48,897 (76%) Gross margin percentage 7% 34% Net Sales
Net sales include (i) resales of certain component products, including DIMMs, SSDs and DRAM products, and sales of our high-performance memory subsystems and (ii) an upfront non-refundable fee pursuant to the Strategic Agreement.
Net product sales increased by approximately
Gross Profit and Gross Margin
Product gross profit increased in 2022 compared to 2021 due primarily to higher sales across all product groups. Product gross margin percentage decreased between the periods as a result of the change in our product mix and increased component product resales as a percentage of revenue.
Operating Expenses
Operating expenses for 2022 and 2021 were as follows (dollars in thousands):
2022 2021 Change Research and development$ 10,624 $ 7,241 47% Percentage of net product sales 7% 7%
Intellectual property legal fees
13% 19%
Selling, general and administrative
9% 11%
Research and Development
Research and development expenses increased in 2022 compared to 2021 due primarily to an increase in employee headcount, related overhead and new product research.
Intellectual Property Legal Fees
Intellectual property legal fees consist of legal fees incurred for enforcement, protection and patent filings and prosecution. Although we expect intellectual property legal fees to generally increase over time as we continue to
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protect, defend and enforce and seek to expand our patent portfolio, these increases may not be linear but may occur in lump sums depending on the due dates of patent filings and their associated fees and the arrangements we may make with our legal advisors in connection with enforcement proceedings, which may include fee arrangements or contingent fee arrangements in which we would pay these legal advisors on a scaled percentage of any negotiated fees, settlements or judgments awarded to us based on if, how and when the fees, settlements or judgments are obtained. See Note 7 "Commitments and Contingencies" of the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for further discussion.
Intellectual property legal fees increased during 2022 compared to 2021 due primarily to higher legal expenses incurred to defend and enforce our patent portfolio internationally.
Selling, General and Administrative
Selling, general and administrative expenses increased in 2022 compared to 2021 due primarily to an increase in employee headcount and overhead and outside services.
Other Income, Net
Other income, net for 2022 and 2021 was as follows (dollars in thousands):
2022 2021 Change
Interest income (expense), net
74 643 Total other income, net$ 131 $ 75 (75%)
Interest expense, net, in 2021 consisted primarily of interest expense on the
Senior Secured Convertible Promissory Note issued on
Other income, net in 2021 included the gain on forgiveness of the PPP Loan of
Provision for Income Taxes
For 2022, our effective tax rate was 0% due primarily to our net loss and
valuation allowances. During 2021, we recorded a provision for income taxes of
Liquidity and Capital Resources
We believe our existing balance of cash and cash equivalents, which totaled
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In addition, on
For a description of contractual obligations, see Note 4, "Debt" and Note 5, "Leases" of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.
Cash Flow Summary
Our cash flows from operating, investing and financing activities, as reflected in the consolidated statements of cash flows, are summarized as follows (in thousands):
2022 2021 Net cash provided by (used in): Operating activities$ (14,995) $ 6,007 Investing activities (467) (520) Financing activities 594 36,466 Net change in cash, cash equivalents and restricted cash$ (14,868) $ 41,953
Net cash used in operating activities for 2022 was primarily a result of net
loss of
Net cash provided by operating activities for 2021 was primarily a result of net
income of
Capital Resources
Second 2021 Lincoln Park Purchase Agreement
On
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2021 Purchase Agreement. As of
SVB Credit Agreement
On
As of
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in
Sales Return Reserves
Our revenue generating activities include variable consideration which is recorded as a reduction of the transaction price based upon expected amounts at the time revenue for the corresponding product sale is recognized. Common forms of variable consideration include limited rights of return for up to 30 days, except for sales of excess component inventories, which contain no right-of-return privileges and volume rebates for meeting established sales targets. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the anticipated performance and all information (historical, current and forecasted) that is reasonably available.
Returns for products sold are estimated using the expected value method and are recorded as a reduction in reported revenues at the time of sale based upon historical product return experience and is adjusted for known trends to arrive at the amount of consideration to which we expect to receive. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.
Inventories
Inventories are valued at the lower of cost or the net realizable value. Cost is determined on an average cost basis which approximates actual cost on a first-in, first-out basis and includes raw materials, labor and manufacturing overhead. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. We evaluate inventory balances for excess quantities and obsolescence on a regular basis by analyzing estimated demand, inventory on hand, sales levels and other information and reduce inventory balances to net realizable value for excess and obsolete inventory based on this analysis. At the
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point of the write-down recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
Warranties
We offer standard product warranties generally ranging from one to three years to our memory subsystem products customers, depending on the negotiated terms of any purchase agreements, and has no other post-shipment obligations or separately priced extended warranty or product maintenance contracts. These warranties require us to repair or replace defective product returned to us during the warranty period at no cost to the customer. Warranties are not offered on sales of component products. We record an estimate for warranty related costs at the time of sale based on our historical and estimated future product return rates and expected repair or replacement costs. Estimated future warranty costs are recorded in the period in which the sale is recorded and are included in cost of sales in the consolidated statements of operations.
Stock-Based Compensation
Stock-based awards are comprised principally of stock options, restricted stock
awards ("RSAs") and restricted stock units ("RSUs"). Stock-based compensation
cost is measured at the grant date based on the fair value of the award and is
recognized as an expense over the requisite service period, which is the vesting
period, on a straight-line basis, net of estimated forfeitures. We use the
Black-Scholes option pricing model to determine the grant date fair value of
stock options. The model requires us to estimate the expected volatility and
expected term of the stock options, which are highly complex and subjective
variables. The expected volatility is based on the historical volatility of our
common stock. The expected term is computed using the simplified method as our
best estimate given our lack of actual exercise history. The risk-free rate
selected to value any particular grant is based on the
Uncertain Tax Positions
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities based on the technical merits of our position. The tax benefit recognized in the financial statements for a particular tax position is based on the largest benefit that is more likely than not to be realized. The amount of unrecognized tax benefits is adjusted as appropriate for changes in facts and circumstances, such as significant amendments to existing tax laws, new regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of an examination.
The application of tax laws and regulations is subject to legal and factual
interpretation, judgment and uncertainty. Tax laws and regulations may change as
a result of changes in fiscal policy, changes in legislation, the evolution of
regulations and court rulings. Therefore, the actual liability for
Recent Accounting Standards
See Note 1 "Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for further discussion.
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